There are probably days when Mark Carney wishes that he had stayed in Canada. It’s bad enough that he felt too politically constrained to talk about a housing bubble until getting implicit sanction from Downing Street, let alone all the attention that his generous relocation package gets. But now his signature policy – forward guidance – has got him into trouble once again.
Accusations about ‘fuzzy guidance’ have been around for a while, but came to a head yesterday with Carney’s appearance at the Treasury Committee. For most of his tenure, Carney has been emphasising that interest rates were on hold for some time, and that people shouldn’t worry – rates wouldn’t go up before 2016. But with a growing chorus of voices not worrying that the economy has run out of spare capacity, Carney’s tone has markedly changed – he is now talking about a rate rise before the end of this year. This flip-flopping led one MP to liken the Governor to an unreliable boyfriend, with people ‘left not really knowing where they stand.’
In part, Carney has some grounds to plead clemency. Some of the recent data have been a bit stronger than the Bank expected, which might justify an earlier hike in rates. But other data have pointed to weak underlying inflationary pressures, which lean in the other direction. Certainly, there is not yet a cast-iron case for a hike in rates this year. And all unexpected data does is highlight again the Bank’s incredibly poor forecasting record. It will take new Chief Economist Andy Haldane some time to clean up Spencer Dale’s old messes.
The larger part of the explanation relates to Carney’s desire to make a splash as Bank Governor. Forward guidance was supposed to be his new policy designed to ensure recovery properly took hold. But within weeks of its introduction, other MPC members were publicly saying that they viewed it as nothing new, or providing little extra benefit. And while he likes to appear collegiate, the word from inside the Old Lady is that Carney is every bit as controlling as his predecessor (as current Bank of Canada employees also attest). This presents a problem, as the MPC take decisions on a one-member-one-vote basis, and members guard their independence jealously. In trying to appear as the voice of the MPC, Carney has been forced to react to the fact that other members do not share his own dovish tendencies, and would like to tighten earlier. This makes him look like flip-flopper.
Even experienced economists – including former BoE staff that I have spoken to – have been left with the impression that Carney has been lurching around too much. Very different pronouncements within such short time frames do not convey the image of a careful driver at the wheel. Carney might claim his messages have been misunderstood; but one of the first rules of communication, as Inflation Report authors are told, is that the person doing the talking is responsible for the effective delivery of the message. When even Andrew Tyrie says that you need to buck up your ideas, you need to take notice. Furthermore, the contrasts both with the ECB – where short coded phrases explicitly indicate the likely direction of travel – and the Fed, which is managing its own stimulus wind-down, are pretty damning. Carney may be bright, and brings considerable experience to the role. But his communication skills leave a lot to be desired. At the moment, he definitely isn’t good boyfriend material.